ISA (UK) 520 · United Kingdom

Analytical Review Tool — UK

Perform ISA (UK) 520 analytical procedures aligned with FRC Audit Quality Review expectations, including threshold-setting, expectation development, and investigation of significant fluctuations.

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The Auditor's Guide to Analytical Procedures Under ISA 520

Complete guide: ISA 520 requirements quick reference, decision flowchart for when to use analytical procedures vs. tests of details, industry-specific ratio checklists for 12 sectors, threshold-setting guide by risk level, sample completed working paper, common quality-review findings, and documentation checklist.

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Analytical Review Under ISA (UK) 520

ISA (UK) 520 Analytical Procedures governs the application of analytical review techniques in audits conducted under UK auditing standards. The standard is substantively aligned with the international ISA 520 issued by the IAASB, but incorporates UK-specific requirements and conforming amendments that reflect the regulatory expectations of the Financial Reporting Council. Post-Brexit, the UK has maintained its commitment to ISA-based auditing while reserving the right to introduce UK-specific amendments through the FRC's standard-setting process. ISA (UK) 520 requires auditors to design and perform analytical procedures as substantive procedures when the auditor determines that analytical procedures are appropriate for the assessed risk, and to perform analytical procedures near the end of the audit that assist the auditor in forming an overall conclusion on whether the financial statements are consistent with the auditor's understanding of the entity. The standard must be read alongside ISA (UK) 315 Identifying and Assessing the Risks of Material Misstatement and ISA (UK) 330 The Auditor's Responses to Assessed Risks, which together establish the framework for determining when analytical procedures are an appropriate response to assessed risks of material misstatement at the assertion level.

FRC Expectations for Analytical Procedures

The Financial Reporting Council's Audit Quality Review (AQR) team conducts annual inspections of major audit firms operating in the UK, including the Big Four and other firms auditing public interest entities. The AQR has consistently identified analytical procedures as an area requiring improvement across multiple inspection cycles. The FRC expects auditors to develop a sufficiently precise expectation of the recorded amount or ratio before comparing it to the entity's financial data. This expectation must be based on identified relationships between financial and non-financial data that are reliable, predictable, and independent of the data being tested. The FRC has criticised auditors who set expectations at an insufficiently granular level, for example developing a single revenue expectation for an entire entity rather than disaggregating by segment, product line, or geographic region where different drivers apply. The FRC's published thematic reviews and annual AQR inspection reports detail recurring deficiencies including the failure to establish a clear threshold for investigation before performing the procedure, inadequate documentation of the data sources and assumptions used to build the expectation, and insufficient rigour in investigating and corroborating explanations for significant differences between expected and recorded amounts. The FRC has emphasised that analytical procedures performed as substantive procedures require the same level of precision and rigour as other substantive testing approaches, and must not be treated as a lower-quality alternative to tests of detail.

Common Inspection Findings

The FRC's published inspection findings reveal several recurring themes in the quality of analytical procedures performed by UK audit firms. First, auditors frequently fail to establish a threshold for investigation before performing the analytical procedure, instead determining retrospectively whether differences are significant. This approach undermines the objectivity of the procedure because the auditor's assessment of significance is influenced by knowledge of the actual difference. Second, the precision of the auditor's expectation is often insufficient to provide the desired level of assurance. The FRC has found instances where auditors developed expectations based on high-level assumptions such as prior-year balances adjusted for general market trends, without incorporating entity-specific operational data that would produce a more precise expectation. Third, the investigation of differences between expected and recorded amounts frequently lacks rigour. The FRC has criticised auditors for accepting management explanations without obtaining and evaluating corroborating evidence, and for failing to consider whether unexpected fluctuations or the absence of expected fluctuations could indicate material misstatement. Fourth, analytical procedures performed at the completion stage to form an overall conclusion on the financial statements are sometimes perfunctory, with auditors relying solely on review of financial statements without developing independent expectations or considering whether the financial statements are consistent with the auditor's accumulated knowledge from the audit.

UK-Specific Considerations

Auditors performing analytical procedures in the UK must consider the regulatory and financial reporting framework that shapes the data under review. The Companies Act 2006 establishes the framework for financial reporting by UK companies, and auditors must understand how statutory requirements affect the presentation and classification of financial data. UK entities reporting under IFRS will present financial statements under UK-adopted international accounting standards, while entities eligible for FRS 102 (the Financial Reporting Standard applicable in the UK and Republic of Ireland) report under a framework that differs in its recognition and measurement requirements. These differences affect the comparability of financial data across periods and between entities, which in turn affects the reliability of analytical procedures. The FRC Ethical Standard imposes independence and objectivity requirements on UK auditors that influence the design and performance of analytical procedures, particularly regarding the use of management-prepared data and assumptions. UK auditors must also consider the impact of macroeconomic factors specific to the UK economy, including the effects of Brexit on trade volumes and supply chain dynamics, Bank of England monetary policy decisions on borrowing costs and consumer spending, and sector-specific trends tracked by organisations such as the Office for National Statistics, the Confederation of British Industry, and HM Revenue and Customs. Additionally, the FRC's Practice Note 10 on the audit of financial statements in the United Kingdom provides supplementary guidance on the application of ISA (UK) 520 in the context of UK-specific reporting requirements. Auditors should ensure that the data used to develop analytical expectations is sourced independently where possible, and that the methodology for developing expectations is clearly documented and capable of identifying material misstatements at the relevant assertion level.

Common Inspection Findings — Financial Reporting Council (FRC)

The following are typical findings from Financial Reporting Council (FRC) inspections relating to analytical procedures:

Insufficient documentation of the auditor's expectation before comparing to recorded amounts — expectation developed retrospectively after seeing actual figures

Failure to investigate significant fluctuations identified through analytical procedures with adequate rigour and corroborating evidence

Over-reliance on management explanations without obtaining independent corroborating evidence to support the explanations provided

Investigation threshold not established prior to performing the analytical procedure, undermining the objectivity of the assessment

Analytical procedures at completion stage performed as a perfunctory exercise without developing independent expectations or considering consistency with audit evidence obtained

Local Standard: ISA (UK) 520
Regulatory body: Financial Reporting Council (FRC)

Frequently Asked Questions — United Kingdom

How does ISA (UK) 520 differ from international ISA 520?
ISA (UK) 520 is substantively aligned with international ISA 520 but includes additional UK-specific conforming amendments reflecting the FRC's regulatory framework. The core requirements regarding the design, performance, and evaluation of analytical procedures are identical. However, ISA (UK) 520 must be applied in conjunction with other UK-specific standards, including ISA (UK) 315 and ISA (UK) 330, which may create different practical expectations. The FRC's inspection themes and published guidance also create a layer of practical expectation that goes beyond the literal requirements of the standard text.
What threshold should UK auditors set for investigating analytical review differences?
The FRC expects auditors to establish a quantitative threshold for investigation before performing the analytical procedure, not after seeing the results. The threshold should be set at a level that would identify differences that could indicate a material misstatement, considering the desired level of assurance from the procedure. For substantive analytical procedures, the threshold is typically linked to performance materiality and the assessed risk of material misstatement. The FRC has criticised auditors who set thresholds retrospectively or who use excessively high thresholds that fail to identify potentially significant fluctuations.
What data sources are appropriate for developing analytical expectations in UK audits?
UK auditors should use data sources that are independent of the amounts being tested and that have a reliable and predictable relationship with the recorded balance. Appropriate sources include prior-period financial data, non-financial operational data such as production volumes or headcount, industry statistics from bodies like the ONS or CBI, budgets and forecasts prepared independently of the financial reporting process, and contractual terms such as lease agreements or pricing schedules. The FRC has emphasised that reliance on management-prepared data without testing its reliability undermines the effectiveness of the analytical procedure.
How does the FRC expect auditors to document analytical procedures?
The FRC expects comprehensive documentation that clearly sets out the objective of the analytical procedure, the assertion being tested, the data sources and assumptions used to develop the expectation, the threshold for investigation, the comparison of the expected amount to the recorded amount, and the auditor's evaluation of any differences. Where differences exceed the investigation threshold, the documentation must include the nature and extent of further procedures performed, the explanations obtained, the corroborating evidence evaluated, and the auditor's conclusion on whether the difference indicates a material misstatement.
When should UK auditors use substantive analytical procedures instead of tests of detail?
ISA (UK) 330 permits auditors to use substantive analytical procedures as the sole substantive response to an assessed risk of material misstatement where the risk is assessed as lower, the relationship between the data is sufficiently predictable, and the procedure can be designed with sufficient precision to identify material misstatements. However, the FRC has noted that auditors sometimes use analytical procedures as a substitute for detailed testing in circumstances where the conditions for reliance are not met, such as where data relationships are not sufficiently stable or where the risk assessment warrants more rigorous testing.
What are common mistakes in completion-stage analytical procedures?
The FRC has identified several common deficiencies in completion-stage analytical review. These include performing only a cursory scan of the financial statements without developing independent expectations, failing to consider whether the financial statements are consistent with the auditor's accumulated understanding of the entity and its environment, not identifying unexpected relationships or trends that may indicate previously unrecognised risks of material misstatement, and failing to document the procedures performed and conclusions reached. The completion-stage analytical review is a mandatory requirement under ISA (UK) 520 and should not be treated as a formality.

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